The newly passed Inflation Reduction Act of 2022 (IRA)[1] is poised to transform the carbon capture utilization and storage (CCUS) industry through significant tax credits and benefits, including through enhancements to Section 45Q of the Internal Revenue Code. The IRA encourages additional capital investment in CCUS projects by developers and sponsors through at least the following:

(1)  Tax Credit Increase: The new Section 45Q base credit amounts  (i.e., either $17/metric ton for sequestered qualified carbon oxide (QCO) or $12/metric ton for used QCO) under the IRS are substantially less than the most recent pre-IRS credit amounts.  However, the IRA, significantly increases the Section 45Q tax credit value per ton to $85/metric ton for captured QCO stored in geologic formations, $60/metric ton for the use of captured carbon emissions, and $60/metric ton for QCO stored in oil and gas fields if certain wage and apprenticeship requirements are met. This increase in tax credit further incentivizes incorporating CCUS into industrial facility projects with a specific focus on meeting the wage and apprenticeship requirements.

 (2)  Expanding Eligibility (Construction Deadline): The IRA expands eligibility for carbon capture and sequestration credits under Section 45Q by extending the beginning of the construction deadline from before January 1, 2026 to before January 1, 2033.

(3)  Expanding Eligibility (Size of Project): The IRA significantly lowers the amount of QCO that projects must capture annually to qualify for Section 45Q credits. Previously, only the largest carbon-emitting projects could meet the capture requirements under Section 45Q: Power plants were required to capture at least 500,000 metric tons per year, industrial facilities were required to capture at least 100,000 metric tons per year, and direct air capture (DAC) facilities were required to capture at least 100,000 metric tons per year. The IRA modifies the definition of “Qualified Facility” under Section 45Q such that the carbon-capture threshold for power plants is reduced to 18,750 metric tons per year, the threshold for industrial facilities is reduced to 12,500 metric tons per year, and the threshold for DAC facilities is reduced to 1,000 metric tons per year.

 (4)  Direct Air Capture: DAC is an emerging technology designed to capture carbon dioxide already in the atmosphere. Although DAC technology is still in its early stages, the IRA places a significant bet on the technology’s long-term viability if certain requirements are met.  While the new Section 45Q DAC base credit amounts (i.e., either $36/metric ton for DAC related sequestered QCO or $26/metric ton for DAC related used QCO) under the IRA are almost identical to the most recent pre-IRA credit amounts, the IRA allows for a significantly greater DAC related credit amount if certain wage and apprenticeship requirements are met - $180/metric ton for projects that store DAC captured QCO in secure geologic formations and $130/metric ton for QCO which is captured and used, including used in oil and gas fields.

 (5)  Direct Pay: One of the most impactful amendments of the IRA concerns how entities can take advantage of the incentive benefit. Called the “elective payment,” or simply “direct pay,” the change allows taxpayers to now claim the value of a Section 45Q tax credit with respect to carbon capture equipment originally placed in service after December 31, 2022 through a tax refund as if it were an overpayment of taxes. With this change, project developers might be able to avoid the onerous process of raising tax equity.

(6)  Transferability: Starting January 1, 2023, taxpayers may elect to transfer Section 45Q credits annually to an unrelated taxpayer. The transferred credits must be exchanged for cash and are not included in the transferor’s income, nor is it deductible by the transferee. IRS guidance may further limit the election.

The IRA’s revisions to Section 45Q credit benefits are likely to result in more liquidity options for project developers, greater clarity for stakeholders attempting to forecast and model CCUS project returns, and significantly increased capital investment in CCUS. To learn more, contact the authors of this article.

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